Совершенно конкурентный рынок

Make a similar scheme for monopoly.

Exercise 7. Find additional information about the sources of monopolistic power and thus types of monopolies.

Optional:

1. Video or Audio (Economics TTC, Lecture 9 “From perfect competition to Monopoly”)
2. Video or Audio (Economics TTC, Lecture 10 “Antitrust and Competition Policy”)

Government in the Mixed Economy

What do Governments Do?

Most resources in Western economies are allocated through markets in which individuals and privately owned firms trade with other individuals or firms. However, governments also play a major role. They set the legal rules; in the marketplace they buy goods and services, from paper clips to aircraft carriers; they produce some services, such as defense; and they make payments such as social security benefits. In financing themselves through taxation and borrowing, governments exert a major influence on prices, interest rates, and production.

Governments in modern industrial economies collect between one-quarter and one-half of GNP in taxes each year and typically spend a little more than they receive in taxes. Because governments play so large a part in economic life, to understand the operation of a modern economy we have to understand not only how markets work but also how government affects the operation of the economy.

This chapter addresses three basic questions about the government's role in economic life. What do governments actually do? How can governments in principle improve the allocation of resources in the economy? How do governments decide what to do? Our aim here is to develop an overview of the role of government as a basis for our continuing discussion of government policy in later chapters.

Table 3-2 shows how the scale of government activity has grown steadily over the last century. It now ranges from a third of national income in Japan to two-thirds of national income in Sweden. What do governments actually do?

Create Laws, Rules and Regulations

Governments determine the legal framework that sets the basic rules for the ownership of property and the operation of markets. If the legal framework outlaws private ownership of businesses, the economy is socialist; if businesses are owned by individuals and operated for private profit, the economy is capitalist. Even in the most capitalist economies, there are limits to the rights of ownership. Not everyone can own a gun, for instance. Nor are people entirely free to use their property as they please; it is usually illegal to build a factory on land in a residential area.

In addition, governments at all levels regulate economic behaviour, setting detailed rules for the operation of businesses. Regulations include planning permission (how land can be used and where businesses can locate), health and safety regulations, and attempts to prevent some types of business, such as the sale of heroin. Some regulations apply to all businesses; examples include laws against fraud and laws that prohibit competitors from agreeing to fix prices. Some regulations apply only to certain industries, such as requirements that barbers and doctors have appropriate training.

Buy and Sell Goods and Services

Governments buy and produce many goods and services, such as defense, education, parks, and roads, which they provide to firms and households. Most of these goods, such defense and education, are provided to users free of direct charge. Some, such as local bus rides and government publications, are paid for directly by the user.

Governments, like private firms, must decide what to buy and what to produce themselves. For instance, governments typically buy com­puters but write the programs they need to operate them. In order to do this, governments must act as buyers in the markets for the services of computer programmers.

Governments also produce and sell goods. In some countries, the phone company is government-owned; in most countries, the government owns and operates urban transport such as buses and the underground.

Make Transfer Payments

Governments also make transfer payments, such as social security and unemployment benefits, to individuals. Transfer payments are payments for which no current direct economic service is provided in return. A fireman's salary is not a transfer payment; a social security cheque is, as are unemployment benefits and interest payments on government borrowing.

Government spending is the sum of government purchases of goods and services and transfer payments. Table 3-1 gives a breakdown of government and welfare activity for several countries.

The scale of government activity is much bigger in a country like Sweden than in a country such as the United States.

Table 3-1. Government activity as a percentage of national income in the mid-1980s.

	UK	USA	GERMANY	SWEDEN
Goods and services bought	24.1	19.9	21.2	30.4
Debt interest	3.5	2.5	2.2	3.1
Other transfer payments	19.2	14.5	20,6	30.3
Total spending	468	36.9	44.0	63.8
Tax revenue	44.1	336	42.9	60.0
Deficit	2.7	3.3	1.1	3.8
Source: OECD National Accounts

Impose Taxes

Governments pay for the goods they buy and for the transfer payments they make by levying taxes or by borrowing. Taxes raised at national level, such as income tax or VAT, are usually supplemented by local taxes assessed on property values or household size.

Table 3-2 shows that the scale of government activity has risen over a long period. For much of this time, governments have been reluctant to meet this extra cost in full by raising taxes. They have run budget deficits financed by borrowing. Budget deficits add to the government's debt. Table 3-3 shows how government debt has changed over the 1980s. Only in the UK has the debt-income ratio fallen during the 1980s.